How net investment income tax works

The net investment income tax, often called NIIT or the 3.8 percent tax, is a surtax on a defined slice of investment income for filers whose modified AGI clears a threshold. Interest, dividends, rents, and capital gains can sit in that slice. Wages generally do not.

On this teaching sheet the slice is an input, so the identity is

$$\text{NIIT} = 0.038 \times \text{NII}$$

On $20,000 of NII the tax is $760. On $5,000 it is $190.

How investments are taxed is the ordinary and capital-gain schedules underneath. NIIT sits on top of those, not instead of them.

A live computation takes the lesser of net investment income and the excess of MAGI over a filing-status threshold. If MAGI is under the threshold, NIIT is zero even if NII is positive. If MAGI is over the threshold by less than NII, the tax is 3.8 percent of that excess, not of all NII.

This sheet skips that lesser-of so the 3.8 percent line is visible. Put the slice that would actually enter the tax.

The tax-equivalent yield calculator on this page compares a tax-exempt yield with a taxable one. NIIT can change that comparison because it is an extra percent on the taxable investment side. Tax-exempt interest is often outside NII.

How FICA works is 6.2 plus 1.45 percent on wages. The additional Medicare tax on high wages is a different 0.9 percent. NIIT is 3.8 percent on a defined investment slice. High earners can see more than one of these. They are not substitutes.

Capital gains tax is the schedule on the gain. NIIT can apply to the same gain after that schedule.

The two teaching rows are $20,000 of NII to $760 and $5,000 of NII to $190, both at 3.8 percent. They are not a MAGI threshold, not a lesser-of, and not a filing status. This is educational material, not financial advice.